Suppose u > d > R in the discrete binomial model. Show that an investor can lock
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Suppose u > d > R in the discrete binomial model. Show that an investor can lock in a riskless profit by borrowing cash as much as possible to purchase the asset, and selling the asset after one period and returning the loan. When R > u > d, what should be the corresponding strategy in order to take arbitrage?
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When u d R In this case the investor can lock in a riskless profit by borrowing as much cash as possible to purchase the asset and selling the asset a...View the full answer
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